Internal Revenue Code § 7874[i] was introduced to discourage U.S. corporations from engaging in certain "inversion" transactions. An inversion transaction, for purposes of § 7874, exists if the following circumstances occur: a U.S. corporation or partnership becomes a subsidiary of, or transfers substantially all of its assets to, a foreign corporation and the former owners of the U.S. entity own at least 60% of the stock, by vote or value, of the new foreign parent corporation. Inversion transactions include stock inversions, asset inversions, and various permutations of these two types.

Congress intended that this new provision capture transactions in which a U.S. corporation reincorporates in a foreign jurisdiction, but the resulting entity has only "a minimal presence in [the] foreign country of incorporation." In light of this intention, the "substantial business activities" exception was enacted. However, new regulations significantly narrow the substantial business activities exception to the point where it captures transactions that were not intended to be in scope.

The changes in the regulations have limited the ability of U.S. multinational corporations to compete against other corporations established in jurisdictions with lower corporate tax rates. The U.S. has one of the highest corporate tax rates in the developed world. In order to achieve corporate tax neutrality, which will encourage companies to establish and maintain businesses in the U.S., the government will need to more aggressively target tax policies and rules that act as disincentives for companies to maintain their operations in the U.S.